Targeting Predatory Lending: Two New Product Intervention Orders Now In Effect

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Two new product intervention orders now in effect impose conditions on the issuance of short-term credit and the continuation of credit agreements with retail customers.

Keys to go

  • Following consultations, ASIC issued two new Product Intervention Orders effectively capping the fees that can be charged to retail customers under continuing and short-term credit agreements at the maximum amounts allowed under the National credit code.
  • The final orders are similar in substance to the draft orders on which ASIC previously consulted.
  • ASIC reported that predatory lending practices remain “an area of ​​concern for ASIC and will remain a priority, especially as credit conditions tighten.”

Insight

Following consultations, the Australian Securities and Investments Commission (ASIC) has issued two new Product Intervention Orders – a Short Term Credit Product Intervention Order and a Continuing Credit Agreement Products – to address what it considers to be the ‘significant/real’ risk of ‘consumer harm’ caused by certain ‘predatory’ lending practices.

Broadly, both orders prohibit the provision of short-term credit and continuing credit agreements that involve charging retail customers unreasonably high fees above the cost caps set out in the relevant subsections 6(1) exemptions. and 6(5) of the National Credit Code (Code).

The orders took effect on July 15, 2022 and will remain in place for 18 months. The new orders only apply to short-term credit facilities and continuing credit agreements entered into on or after July 15, 2022.

Orders

The orders target two loan models used by Cigno Australia Pty Ltd (Cigno Australia) and its associates.

Intervention order on short-term credit products

The Short-Term Credit Product Intervention Order targets a “two contract” lending model involving retail customers entering into a short-term credit contract with the credit provider, in conjunction with a collateral contract separate (with an associate of the credit grantor). Under the Warranty Agreement, the Associate charges the Customer significant fees/other charges. Overall, the fees charged under both contracts are higher than what is permitted under the short-term credit exemption provided in Section 6(1) of the National Credit Code.

The new ordinance expressly limits fees/charges payable by retail customers under short-term credit agreements (including collateral agreements and/or “a contract, arrangement or arrangement that is part of a series or a combination constituting the Short Term Credit Facility”) to the maximum amount permitted under Section 6(1) of the National Credit Code.

Read the full text of the new ordinance.

The new order appears to be substantially the same as the draft order ASIC previously consulted on (summary) and similar to the 2019 order previously in place ASIC Corporations (Product Intervention Order—Short Term Credit) Instrument 2019/ 917 (abstract).

Credit Product Continuing Intervention Order

The Credit Products Continuing Intervention Order targets a similar lending model.

Generally, the order caps the total fees that can be charged to retail customers under: a) the “continuing credit agreement”; (b) “a collateral agreement (other than a non-cash payment facility)”; or (c) “a contractual arrangement or agreement belonging to a series or combination which constitutes the continuing credit agreement” up to the maximum amount authorized under subsection 6(5) of the Code.

Again, the new order appears to be similar in form to the draft order (summary) that ASIC previously consulted on with some “technical editorial changes” made in response to comments received during the consultation.

These changes include changing the definition of buy-it-now, pay-later (BNPL) agreements to:

  • include arrangements where a BNPL supplier pays an invoice on behalf of a retail customer; and
  • to clarify that the relevant identifier that is provided or made available by the BNPL Provider to the Retail Customer to pay the Merchant for the supply of goods or services, must be a debit card or a credit card.

Read the full text of the new ordinance.

Scope

For greater clarity, as noted above, the orders do not have the effect of prohibiting the provision of all short-term or continuing credit agreements that rely on the relevant exemptions in subsections 6(1) and 6(5) of the National Credit Code.

Rather, they are intended to limit the total fees that may be charged under the “two contract” model used by Cigno or similar lending models, to the limits prescribed in the National Credit Code.

ASIC has warned it may take further action if necessary

ASIC makes it clear that it will not hesitate to take further action to “address the risk of significant harm and harm resulting from the design and operation of these or similar products” if necessary.

“ASIC has identified significant harms and harms, particularly to vulnerable consumers. ASIC again exercised its powers to prevent borrowers from being charged excessive fees to obtain these products. These intervention orders will protect retail customers from predatory lending practices and prevent credit grantors from charging unreasonable fees for small amounts of credit. This remains a concern for ASIC and will remain a priority, especially as credit conditions tighten.

In a statement welcoming ASIC’s action, Consumer Action Law Center CEO Gerard Brody called on ASIC to remain vigilant:

“Returning product work orders provides consumers with certainty and security in the future use of these models. However, we urge ASIC to do everything in their power to seek compensation for those who have paid Cigno’s excessive fees in the past… We also encourage ASIC to closely monitor Cigno’s operations in the coming months as there is a real risk that yet another avoidant lending model will develop to continue trading. The best solution to this kind of predatory lending is for the federal government to simply close the loopholes and gaping exemptions that exist in our financial services laws.”

[Sources: ASIC media release 14/07/2022; ASIC Corporations (Product Intervention Order – Short Term Credit) Instrument 2022/647; Short Term Credit Product intervention order Explanatory Statement; Short Term Credit Product intervention order notice; ASIC Corporations (Product Intervention Order – Continuing Credit Contracts) Instrument 2022/648; Continuing Credit Contracts Product intervention order Explanatory Statement; Continuing Credit Contracts Product intervention order notice]